The question investors are asking about the 2019 outlook of Kinder Morgan (NYSE:KMI) stock is simple.
Will the company pay its dividend, expected to reach $1 per share for 2019, up 60% from last year? If it does pay up, investors are looking at a yield of about 5.5%, based on the price of Kinder Morgan stock this morning. Things should be even better for the owners of KMI stock in 2020, as the company’s capital investments are expected to start generating distributable cash flow.
KMI is currently flush with cash after selling its Trans Mountain Pipeline in Canada to the Canadian government for $3.5 billion. The money will be invested in U.S. natural gas pipelines, which will move gas from the Permian Oil fields in West Texas to export terminals on the Gulf Coast.
KMI will need about $2 billion of cash flow to fund the expected dividend of Kinder Morgan stock. KMI has estimated that it can generate $5 billion of distributable cash flow in 2019.
KMI Is a Natural Gas Giant
Once known primarily for moving crude oil to refineries, Kinder Morgan is transforming itself into a company that moves natural gas from fields to export terminals. KMI is already exporting gas to Mexico, and its capital budget is now largely being used to support Liquified Natural Gas terminals that are being built along the Gulf Coast.
KMI is funding two major gas projects with its $2.1 billion capital budget this year. A 42-inch pipeline called the “Gulf Coast Express” will run from West Texas to Corpus Christi on the Gulf coast and should be done by October. A second pipeline, dubbed the “Permian Highway,” will run from the Permian Basin hub in West Texas to the Houston area and is due to be completed in 2020.
The problem is that the Texas where Kinder Morgan is building pipelines today is nothing like the Texas that the company used to work in. The state is more urbanized and even the most politically-conservative landowners don’t want a fat gas pipeline running across their land.
While the Texas Hill Country area was dismissed as just ranch land a generation ago, it is now valuable real estate, and it’s one of the most “environmentally sensitive” areas in the state.
Still, the pipelines will likely be built, since Texas law is entirely on Kinder Morgan’s side. But the pipelines still require a great deal of land, so public meetings on the project will be tense.
KMI’s Growing Risks
The land requirements of the pipelines make them about as popular as cigarettes in the Hill Country.
Costly accidents could also hinder Kinder Morgan’s ability to pay its dividend. The company’s 2019 dividend is expected to consume only 45% of its cash flow this year, and its leverage ratio is the lowest it has been in years, giving it the balance-sheet flexibility and cash it needs to to fund its capital spending, However, an accident could prove to be disastrous for the company’s financial position.
The Bottom Line on KMI Stock
By conventional standards, Kinder Morgan stock is undervalued. Its most recent earnings, announced on Jan. 16, showed net income of $483 million, earnings per share of 21 cents, and revenue of $3.78 billion.
Kinder Morgan’s debt rating has recently been upgraded by Moody’s and Standard & Poor’s, while KMI’s adjusted net debt is just 4.5 times its EBITDA.
And if management’s cash-flow forecast turns out to be right and KMI is able to avoid costly accidents and get its pipelines in Texas built, the pipeline king will be back.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.